Through a
shopper’s eyes
Adopting a
customer-centric
approach to
category
management
A report from the
Economist Intelligence Unit
Sponsored by SAP
Through a shopper’s eyes
Preface
Through a shopper’s eyes: Adopting a customer-centric approach to category management is an Economist
Intelligence Unit report sponsored by SAP. The findings and views expressed in the report do not
necessarily reflect the views of the sponsor. The Economist Intelligence Unit’s editorial team conducted
the interviews and wrote the report. Rob O’Regan was the author of the report and Gilda Stahl was the
editor. Mike Kenny was responsible for layout and design. Our thanks are due to all of the interviewees for
their time and insight.
© Economist Intelligence Unit Limited 2009
1
Through a shopper’s eyes
Introduction
C
“Our job is
to introduce
consumers to
things they’re not
looking for while
they’re in the store,
without it being an
intrusion.”
Mark Heckman,
vice-president of marketing
and advertising,
Marsh Supermarkets
2
onsumer attitudes about the goods and services they purchase were shifting long before recession
gripped the global economy. G Robert James, vice-president of strategy and insights for The Great
Atlantic & Pacific Tea Company Inc (A&P), the US-based supermarket chain, coined a term for this new
group of consumers: “the iPodian Society”. “We saw a dynamic shift in consumer expectations in around
2000 to, ‘everything a retailer does has to be configurable so that it suits my lifestyle,’” he says. The
challenge for retailers attempting to win over the iPodians, he admits, is that “many of us are still in an
8-track world.”
Retailers have not transformed their strategies to address effectively this new consumer mindset.
It’s not for lack of effort, however. In order to drive sales, many retailers have adopted a strategy called
category management, a concept introduced in the early 1990s that involves the grouping of products
into strategic business units, or “categories”—for example, deodorant or canned vegetables—and
customising their placement and presentation on a regional or local basis to meet shopper needs.
Category management requires a higher level of collaboration between a retailer and its manufacturing
and distribution partners, who must share insights and information as they work towards a common goal:
increased profits for the entire category, not just a particular brand.
In the years since its inception, category management has been standardised around an eightstep approach, which ranges from defining the category to developing the strategy to devising and
implementing specific tactics, then reviewing (and responding to) the results. Some retailers, however,
view this framework as too unwieldy in an increasingly dynamic, consumer-driven environment. Now,
more retailers are looking to take a more consumer-centric, solutions-based approach to category
management in order to improve the category mix and influence buying decisions at the point of sale.
“Our job is to introduce consumers to things they’re not looking for while they’re in the store, without
it being an intrusion,” says Mark Heckman, vice-president of marketing and advertising for Marsh
Supermarkets, a US grocer with 104 stores in Indiana and Ohio. Marsh has seen sales increases of up
to 15% in some categories since revamping the layouts of about three-quarters of its stores to expose
shoppers to more grocery products.
© Economist Intelligence Unit Limited 2009
Through a shopper’s eyes
Declining sales, discerning shoppers
D
espite advances in such sales strategies, many retailers and product manufacturers find it difficult
to deliver a consistently strong return from in-store sales. According to the Grocery Manufacturers
Association (GMA), a trade association that represents the food, beverage and consumer products
industries, more than 70% of consumer goods categories had lower sales increases from promotions
in 2008. Launching new products is not necessarily the solution; Nielsen, a media research company,
estimates that the success rate for new products is only 20-30%.
Compounding the challenge is that recession-weary shoppers are more circumspect than ever in
their purchasing decisions. Global retail sales are expected to decline 3.7% in 2009, according to
the Economist Intelligence Unit. The Economist Intelligence Unit also expects faltering consumer
confidence to fuel a rise in discount products and private supermarket labels at the expense of branded
items, further eroding profit margins. “Consumers are exercising basic economic smarts,” says Mr James.
“They’re looking for smarter ways to stretch their budgets, so they’re buying more items off the ad than
just straight off the shelf.”
Retailers, for their part, are attempting to gather as much information as they can about consumer
trends. They understand that these trends will help them develop category-management strategies
that focus less on products and more on solutions that reflect consumer behaviour. What they’ve found,
however, is that while the data sources are plentiful, it’s often difficult to separate useful insights from
the clutter.
Marsh Supermarkets collects a vast amount of shopper and consumer data from transaction logs and
its loyalty card programme at the point of sale. It also conducts primary and syndicated research. “When I
first got here, our chairman said we were information rich and insight poor,” says Mr Heckman, who joined
Marsh in 2006. “My job was to take that and turn it into something actionable.”
The problem for Marsh and many other retailers is that the spirit is willing, but the infrastructure is
weak. Much of the data companies collect are isolated within departments rather than shared across the
organisation. “From a data architecture standpoint, we’re very limited,” says Mr Heckman. “We’re working
to change that.”
“Consumers are
exercising basic
economic smarts.
They’re looking
for smarter ways
to stretch their
budgets, so they’re
buying more items
off the ad than just
straight off the
shelf.”
G Robert James,
vice-president of strategy
and insights
A&P
A consumer-based approach to
category management
R
etailers understand the potential benefits of improving the pricing, packaging and presentation
of products to make them more appealing to consumers at the point of sale. More than 70% of
purchasing decisions are made in-store, according to Shopping Behaviour Xplained Ltd, a UK research
agency. Furthermore, in a 2008 survey from the GMA and Deloitte, 86% of retailers rated “shopper
marketing” programmes among the top four activities that deliver meaningful return on investment
© Economist Intelligence Unit Limited 2009
3
Through a shopper’s eyes
“As with any
company, the
challenge is
making sure the
right people see
the information at
the right time.”
Chris Webster, head of space
planning, John Lewis
(ROI); half of the retailers ranked in-store activities as the primary ROI generators.
Capturing ROI begins with a solid base of consumer insights. Data sources are abundant, both from the
point of sale and the broader market, and retailers are using the full arsenal of information available to
them. Traditional methods such as primary and syndicated research and point-of-sale data are augmented
by shopper loyalty programmes.
Some retailers are also tapping into emerging technologies like radio frequency identification (RFID)
tags and virtual shopping, in which consumers “shop” in a simulated store online and record displays
that capture their attention. The combination of traditional and emerging research approaches is giving
companies a better perspective of shopper behaviour. The trick is what they do with that insight. “Our
mantra is, ‘what, so what, now what?’” says A&P’s Mr James. “What does it mean, and what do we do about
it? We synthesise everything, assimilate the insight, and apply it to relevant actions.”
For example, in anticipation of the economic downturn, A&P spent years modelling consumer
behaviour to determine which items would be most affected by a shift in the economy. It also rolled
in other macro trends such as an increased interest in health and wellness. “We anticipated which
items consumers would flock to,” says Mr James. “We sat with the manufacturers, went through the
methodologies, compared our data with their numbers, and used that information to build programmes
around for the next couple of years.”
One beneficiary of this advanced scouting: canned tuna, which received a boost from budget- and
health-conscious consumers. Dollar volume in the canned fish category increased by nearly 15% and
unit volume rose by 14% in early 2009, compared with the same period a year earlier. “The growth
projections”, says Mr James, “were amazingly on target”.
Innovating through collaboration
and co-creation
W
hen UK retailer John Lewis was developing the concept for a new food hall inside its flagship Oxford
Street department store in London, the launch plan became the shared responsibility of several
groups: retail design, store operations, buying teams, finance, marketing and personnel. As this was the
firm’s first foray into food operations, it also collaborated with colleagues from its sister supermarket
chain, Waitrose.
“Working across both businesses was unusual from how we had operated in the past,” says Kim Morris,
head of retail design for John Lewis. The combination of Waitrose’s food expertise and quality service
and John Lewis’s reputation for customer care was a successful match: since opening in October 2007,
the food hall has surpassed its sales targets and John Lewis is currently building a second food hall at its
Bluewater location in Kent.
“The flow and access to information is widely shared across the company,” says Chris Webster, John
Lewis’s head of space planning. “As with any company, the challenge is making sure the right people see
the information at the right time.”
This type of collaboration is critical for transforming consumer insights into successful in-store tactics.
4
© Economist Intelligence Unit Limited 2009
Through a shopper’s eyes
Some of these information-sharing methods can be automated; others may be as simple as initiating a
telephone conversation.
“When we don’t have an answer on what the data shows, that’s when we talk to the managers in the
stores,” says Paul Millar, head of operations for Pantaloons Fashion Retail, a division of Pantaloon Retail,
which operates more than 1,000 retail stores across India through multiple chains. “We have a lot of raw
data, but we want to get more qualitative data from the stores,” says Mr Millar.
This collaboration increasingly includes suppliers and brand manufacturers. Historically, these groups
have been reluctant to share data, but the ever-finicky consumer has led them to work more closely with
retailers. Consider how French retail giant Carrefour aligned with Colgate-Palmolive, the US consumer
goods manufacturer, to re-group its oral-care products around Colgate’s four-step model for oral care:
toothbrush, toothpaste, dental floss and mouthwash. After Carrefour changed its in-store groupings to
mimic that model, sales in the category increased by 25% over the previous year.
Smaller chains like Marsh are also developing relationships with suppliers to glean better consumer
insights. “We share some of our frequent shopper data with them,” says Mr Heckman. “It’s much more
open than it used to be. A retailer of our size can use all the help we can get from the suppliers to compete
with the larger chains.”
Retailers and suppliers are also working more closely on supply-chain issues to ensure that the most
popular merchandise stays in stock. In emerging markets like India, that’s a major challenge. “We’re
still a long way from real-time replenishment,” says Pantaloon’s Mr Millar. “We’re improving; last year
when we were selling out of products, we would be out for three or four weeks. This year it’s down to
a week. We’re getting better turnarounds because we’re getting information to suppliers and getting
reorders in quicker.”
Retailers and
suppliers are
working more
closely on supplychain issues to
ensure that the
most popular
merchandise stays
in stock
Differentiating through localisation
C
onsumer insights are increasingly having an impact at the local store level. National and regional
retailers are moving away from standardised store formats and adapting their layouts, merchandise
and presentation towards local lifestyle segments. In general, stores are being given more autonomy to
adjust their strategies to meet local consumer needs.
For example, Marsh’s efforts to revamp its store formats over the past two years is a significant move
away from the chain’s traditional approach, where all stores sported similar layouts and displayed the
same basic product mix. Using psychographic, demographic and transactional data, Marsh teams adjusted
foot traffic patterns to give shoppers more options on how to navigate the stores. They showcased
more products on end caps—popular display areas at the end of an aisle—and mixed in more privatelabel brands. The result: 10-15% growth in popular categories such as paper products and carbonated
beverages, and 5-7% sales growth in lower-penetration categories like bakery items and canned
vegetables.
John Lewis is also focusing more on customer solutions with a new shop format it plans to launch later
this year. Targeting the home sector, the stores will be smaller than traditional John Lewis department
© Economist Intelligence Unit Limited 2009
5
Through a shopper’s eyes
“Consumer demand
is making us decide
which lifestyles we
want to respond
to and then put
those [formats]
in the right
neighbourhoods.”
G Robert James,
vice-president of strategy
and insights,
A&P
6
stores, and the category mix will reflect solutions over products. For example, customers who want
to make their own curtains will be able to browse a do-it-yourself area that features fabric, scissors
and threads. For shoppers who prefer to purchase higher-end, handmade curtains, customer-service
personnel will be on hand to assist.
Other retailers are adopting similar strategies. Italian grocer Esselunga experienced a growth rate
double that of its competitors after changing its superstore format to reflect Italians’ preference for
neighbourhood grocers and healthy food items. Walgreens, the US pharmacy chain, is redesigning
its stores to be more “solutions-focused” around essential items and discretionary needs. “Consumer
demand is making us decide which lifestyles we want to respond to and then put those [formats] in the
right neighbourhoods,” says A&P’s Mr James.
At the same time, retailers are seeking new ways to measure success. John Lewis tracks several metrics,
including profit per square foot, gross margins and contribution profit across categories. A key next step:
a standard reporting mechanism to make sure the entire company is aligned around the customer-focused
strategy. “We need to make sure everyone understands why decisions are being made and how they
support the customer journey,” says Mr Webster.
© Economist Intelligence Unit Limited 2009
Through a shopper’s eyes
Conclusion
R
etailers looking to improve the effectiveness of their category management initiatives will need to
continue to focus on enhancing a customer’s in-store experience. As retailers such as A&P, John
Lewis, Marsh, Pantaloon and others have demonstrated, positive results can be driven with an emphasis
on three key strategic activities:
l Collaboration: Co-ordinating activities, data and insights among sales, marketing, merchandising,
logistics and operations, and collaborating with distributor partners to understand and meet the needs
of target customers or segments.
l Business intelligence: Retailers need an infrastructure to organise, share and maintain the
information they are collecting from consumers, partners and service providers; otherwise, key insights
could be lost or overlooked.
l Localisation: Adapting packaging, pricing, promotions to address local and regional consumer
demographics and psychographics; revamping store formats and layouts around lifestyle trends, not
products; and expanding private-label offerings to offer more choice.
Exploring innovative ways to divine consumer insights from across and outside the organisation will help
retailers improve category performance and attract and retain loyal shoppers. Retailers that can balance
short-term gains with long-term objectives—while adapting quickly as consumer attitudes shift—can gain
some separation between themselves and the rest of the pack.
© Economist Intelligence Unit Limited 2009
7
Cover image: iStockphoto.com
Whilst every effort has been made to verify the accuracy
of this information, neither the Economist Intelligence
Unit Ltd nor the sponsors of this report can accept any
responsibility for liability for reliance by any person
on this report or any other information, opinions or
conclusions set out herein.
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